How the American/US Airways Merger Trial Can Be Avoided

We’re now less than a month away from opening arguments in the Department of Justice’s (DOJ) antitrust case trying to prevent American and US Airways from merging, and the rumors are ramping up that a settlement is being discussed. The closer American and US Airways Merger Waitingwe get to the trial date, the higher the chance that the two sides settle. How can we get to that point where the trial becomes unnecessary?

In general, neither side wants to go to trial. Lots of secrets end up being made public, and nobody likes that… except for journalists who get all kinds of tasty fodder from these things. (I spent hours cuddled up with the American/Sabre transcripts. Man, did Sabre look bad in that one, which would probably explain why they settled only 5 days in.) In addition, each side risks losing everything. A settlement avoids the courtroom drama and each side walks away with something.

If it goes to trial and DOJ wins, then the merger is off completely. The airlines don’t want that. However, if it goes to trial and the airlines win, then they get to merge exactly as they want, keeping all of their slots at Washington’s National Airport. DOJ doesn’t want that. As we get closer to the trial start date, the reality of what could happen starts to sink in.

DOJ may have been banking on its delay tactics to get the merger to fall apart on its own, but that isn’t happening. The judge has rebuffed pretty much all of the department’s delay attempts. This merger isn’t falling apart before the outcome of the trial is known, and that might make DOJ a little more nervous.

We also don’t know much about how each side is feeling about its case. DOJ went into it with a full head of steam, thinking it had the case won. But it has had more time to dig in to the issues, and it might not be as confident as it once was. The same could be true for the airlines. Either way, I think there’s probably a natural instinct to feel less confident on each side as the trial draws closer. You can just never know what the other side will present entirely, and you just can’t know how the judge will rule.

The court also would rather avoid a trial. It suggested mediation, and both sides have agreed to using an undisclosed mediator for talks. That doesn’t mean the talks will go anywhere, but a mediator should at least help them find a path forward, if one exists.

So what would a path forward look like? That’s the billion dollar question. To start, egos would have to be put aside.

There’s no doubt that any kind of settlement would have to involve the divestment of slots at Washington/National. That is a piece of DOJ’s complaint, and it was always assumed to be the big sticking point before the lawsuit was filed. If DOJ settles, I would imagine it would want all of American’s current slot pairs (50+) made available to new or limited entrants at the airport. I can’t imagine American and US Airways would be willing to give up all those slots. So they would need to find a common ground somewhere in between.

Beyond that, it’s hard to figure out what else could be included in a settlement. They’ve already agreed to give up a slot in London for an airline to fly to Philly. That was all the European Union wanted to approve the deal, and I would be shocked if any more London slots would be required by DOJ. Most of the other airports where the airlines fly either aren’t slot controlled or aren’t dominated by these airlines.

Could there be some sort of agreement to limit price increases or fees for a period of time as part of the settlement? It’s hard to see how something as sensitive as future pricing could be included in a settlement. That would be the ultimate signalling move in the airline industry. While I would be surprised if the airlines agreed to serious handcuffs like that, I could see them agreeing to not impose a frequent flier redemption fee for a period of time. That was specifically mentioned by DOJ in its complaint, so that could help DOJ save a little face.

But the biggest sticking point here is going to be whether the DOJ is willing to swallow its pride and agree to a settlement that clearly does not satisfy everything in its complaint. It has made such broad accusations that there is no settlement out there that could satisfy all the issues and still allow the airlines to merge. So DOJ would have to be ready to accept that, and I would think it would only do that if it felt its chances of winning the case were quickly slipping away.

More and more people are talking about a settlement coming down the pipe before the November 25 trial start date. I’m still not convinced, but it would be great if it happened.

37 Responses to How the American/US Airways Merger Trial Can Be Avoided

  1. Ben G says:

    “They?ve already agreed to give up a slot in London for an airline to fly to Philly. That was all the European Union wanted to approve the deal, and I would be shocked if any more London slots would be required by DOJ.”

    AA just recently transferred one of its daily JFK-LHR frequencies to BA, effective 3/29/14. I have to wonder if this might have been some sort of hedging against a possible divestiture demand.

    • CF says:

      Ben G – The AA transfer is just temporary. They did it because they wanted flat beds on every JFK – Heathrow flight and American didn’t have the planes to do it. It’ll revert back to American later.

  2. I could be wrong, but I’ve always felt a settlement was likely. If the biggest argument is too much concentration, the DOJ should have considered that three mergers ago. Much of the current suit may be over that very issue. But now that those are accomplished, it would be silly to go forward with two very strong legacies and two weak sisters. How much real world difference (not anti-trust mumbo jumbo) is there between 80% control by three or four large carriers?

    Now that discovery has been done, the sides have more real information to work with. As you write, it’s possible the DOJ may realize its case wasn’t as strong as it originally thought. I felt most of it was based in emotion, not real data. Now both sides have real data.

    As for DCA, I think a nice round number of divested slots would be around 48, or 24 pairs. That splits the difference. They could be auctioned off in eight pair bundles as in the Delta / US Airways “slot swap.”

    If US Airways makes money on “Advantage Fares” it (the new American) would be foolish to stop the practice. I’m sure the merged carrier will still have plenty of connecting itineraries that would compete head-to-head with non-stop Delta and United flights (not to mention Southwest). The end of the Wright Amendment will also open up opportunities for Southwest (which, interestingly is strangely absent from the DOJ’s suit, hmm …).

  3. Gary73 says:

    I’ve always felt the DOJ suit was an over-reach, politically motivated (this DOJ??? nahhh) by an Administration that somehow at every turn thinks “it knows better.” The suit itself didn’t pass a smell test that even first year law school students should see from whatever altitude. BTW, Cranky has been “required reading” in several “interested government circles” who take issue with DOJ’s rookie filings. An arbitrator gives both sides (but most assuredly DOJ) a “way out,” especially true for DOJ which is finding out that it never should have filed to begin with. The “train left the station” on consolidation a long time ago; it was long overdue if U.S. carriers were to compete globally. To force independent AA and US to compete separately against established US and intl mega carriers only begs a repeat merger attempt later (same or different players, depending on who’s still in business) or worse…ultimate liquidation.

  4. So what happens if they do go to trial, one side wins and theres an appeal? Would US/AA hang in there or throw in the towel?

    • CF says:

      Nick – If AA/US wins, then DOJ will ask the court for a stay on the merger while the appeal is pending. The court rarely grants that, so it would most likely go through. If DOJ wins the appeal, well, that would be pretty awkward and there’s usually some kind of settlement to just make it go away. If DOJ wins, then the airlines can appeal and it’s just the status quo until the appeal is heard or the merger falls apart. The reality is that it’ll likely fall apart because an appeal would take a long time.

      In other words, whoever wins this round likely wins the war.

  5. How naive. Does DOJ really believe the separate airlines wouldn’t raise fares and fees and cut service?

  6. Peter says:

    From the beginning of this action by the DOJ I have strongly felt that it was an overreach by our arrogant government acting more like the thug criminals they are. I can’t imagine any private concern operating like this without the DOJ filing RICO actions against them. DOJ should do the right thing and drop this and let the merger proceed. Wishful thinking? Yep!

  7. Tom says:

    This trial has been set because the DOJ was a little too slow to learn that mergers are about eliminating competition, raising prices, making execs rich, and cutting staff. The AA/US temper tantrum that their merger should be approved because ‘everyone else’s has been’ is ridiculous–each merger changes the competitive landscape and new ones need to be re-examined in the current market….not one in the past. Their argument about network is dubious given both US and AA are in strong global alliances. AA and US are making money. Everyone else is. I shutter at the thought of what will happen to prices with one more competitor leaving the scene. The mergers so far have been a giant mistake…hopefully they’ll stick to their guns but I doubt it… as corporate American has bought the US government lock, stock and barrel.

    • Goober says:

      AA and US are not strong global airlines, they are weak compared to the competition.

      The decision has been made to merge and that is final. The only thing left is to defeat the weak doj argument in court which will be very easy. That is why I think the doj will settle, they must know they can’t win at this point.

  8. If the American/US Air mereger turns out anything like the United & Continental debacle it wil be a disaster. In a short time United went from being a premier carrier to being one of the worst US based airlines in the industry. Their service is terrible, their flight attendants are down right rude and their commitment to high mileage flyers is gone. Many longtime United customers have taken advantage of Delta and American Airlines “status match” offers and transitioned to a new Airline. Myself included. The ojnly winners in the United/Continental merger were Continental employees and customers.

  9. Mark Wells says:

    Yes, the comments above are an understatement regarding United’s fast decent form the best to worst. In the last two years (before leaving United For Delta) I had the worst flights I’ve ever experienced on United. I got to the point I would avoid going through Houston or Newark to avoid Continental flight crews but that wasn’t a guarentee you would get stuck with a contiental crew and plane. It seems United has abandoned their frequent flyers in hope to become Southwest..

  10. Tracey Parker says:

    No arguement here, I used to fly yhem all the time. Now I refuse to fly United Airlines. I fly American or Alaska Airlines. They’ve been fine. Much, much better than united.

  11. Arubaman says:

    Prediction: It will take more than DCA slots to settle this. Throw in some LGA slots and you might just have a deal.

  12. If AA can be the largest carrier at DFW and US at PHL now and combined even larger at those two airports, why can’t the new US/AA be the largest at DCA?

    Why should slots come into play? If other airlines can’t start a large operation at DFW/PHL due lack of space, why should DCA be treated different.

    • CF says:

      David SF – Slots come into play because other airlines want to serve the airport and can’t. Anyone can start Philly or DFW tomorrow if they want, but nobody has that option in DC.

  13. Gary73 says:

    Maybe it will take more than DCA slots but don’t look to LGA. US gave away all that to DL and AA doesn’t have a large mainline presence.

    On the subject of domestic mega carriers, let’s not let the UA/CO merger dictate the answer. If you do, then you have to give credit to DL/NW for doing it right. Each is different and involves a lot of moving pieces/parts and….dare we say….personalities.

    Like it or not, before this all started, the US was saturated with too many carriers, not making enough, if any money. Meanwhile, the BA’s, LH’s and now middle and far east carriers of the world were eating our lunch. God bless the “Mom and Pop” stores of yesteryear but ultimately, they couldn’t compete with the efficiencies, convenience and yes, even lower prices of the emerging Safeway’s, WallMart’s, Home Depots etc. Some of you are “worried” that fewer carriers means higher fares and less competition. That’s a possibility but if you have 3-4 going concerns that can compete with each other, that’s not a monopoly, that’s strong competition and there will be downward pricing pressure. Don’t be fooled by the “GAO study” that showed allegedly less competition on thousands of city pairs. Cranky totally debunked that study (clearly done by GAO’s own rookies…first cousins to the clueless in DOJ). You can still shop/compare and compete with 3-4 megas, WN and a handful of “regionals” that don’t overextend. I do it now and it won’t go away with a US/AA merger. In fact, that kind of competition may be just what the “new” UA needs to kick itself back into gear. Indeed, broader competition all around.

  14. Ed Kelty says:

    The prior mergers have been a strain on customers and a questionable benefit for the surviving airlines. The AA/US merger would probably follow the same pattern.
    The only new variable is that AA might be able to make it on its own.

    That would leave the opportunity for US and Alaska to have a code-share or some other agreement to cover their combined routes from Hawaii to Europe. This could be a match

    • Why does everyone immediately ignore Delta and focus on UA when discussing mergers? They’ve done great things, they’re operationally solid. They’ve provided the text book example of how to properly execute an airline merger.

  15. Alex Hill says:

    The core of the DOJ’s complaint is that the anticompetitive effect of this merger is in the elimination of a competitor (specifically, a legacy airline that’s too small to appeal to everyone and therefore has to provide competitive pressure to keep airfares down), not that USdbaAA will have too many slots at DCA, LGA, or anywhere else. There’s no way I can see to settle that complaint besides something absurd like funding a new spin-off airline that is essentially like the current US. (Such an approach has been used in the past for bank mergers; I vaguely remember when FleetBank and Bank of Boston merged, they were forced to sell a bunch of duplicative branches to other banks, mostly Sovereign Bank in the Boston area, to create a real competitor. That’s not possible with airlines.)

    I just don’t see a settlement that could satisfy the DOJ’s (entirely convincing, in my opinion, though I know I’m in a minority here) anti-trust objection. Could USdbaAA promise to keep providing Advantage fares or something similar for some number of years? Doubtful: that’s essentially impossible to regulate or enforce, which is why preventing this merger is actually a path of relatively little government involvement. So my 2c are that the DOJ won’t back down. It’s possible that AA and US will decide they don’t want to go through the trial and just throw in the trial, but I doubt that too.

    • CF says:

      Alex – Remember DC Air? That was the UA/US attempt to get the merger to go through back in 2000. The idea was to spin off DCA operations into DC Air, run by the head of BET. I’m pretty sure they were going to align with American. What a joke that was.

      I tend to agree with you on the chances of a settlement. Not great.

      • Arubaman says:

        As I have written repeatedly: It is in the best interests of both parties to settle. Mr. Parker wants this merger very badly. The DOJ wants to save face. There is a deal to be had here. Only EGO (of which there is no paucity in this Goverment and in this industry) will stop both sides from declaring victory.

        • Alex Hill says:

          Except that I (and presumably the DOJ) think that the most likely scenario in court is that the DOJ will win, so the DOJ settling would be quite the opposite of saving face. The arguments saying that the DOJ is wrong on this case (including Cranky’s) talk about the business case and how weak AA is compared to DL and UA. However, as a non-lawyer, it’s unclear to me what that has to do with anti-trust law. AA is in no danger of near-term failure, so I don’t think the stronger business case has any relevance: all that matters is whether the merger would unlawfully harm competition, which appears likely to me.

          I’m curious: what is the deal to be had that even vaguely addresses the DOJ’s concern? DCA slots isn’t it.

      • Alex Hill says:

        Cranky: vaguely. Does sound like quite a joke!

    • Goober says:

      That is why the doj has to settle. Their complaint is so absurd that it will not stand up in court.

  16. olamide says:

    Cranky I read an article that says that deltas 1.3 billion dollar profit which a larger portion was from a raise in ticket fairs proves DOJ argument against a merger. what do you think?

    • CF says:

      olamide – If anything, it proves the opposite in my mind. Delta shows what a well run airline with a global network can do. United isn’t there yet, and may not be for a long time the way things are going, but it has the network. US Airways is well run but it doesn’t have the network and Delta is winning a lot of business because of that. (US Airways specifically called out losses in some domestic markets like the NY Shuttle because of Delta.)

  17. What makes it so hard to predict the odds of a settlement is that predictions are most accurate when you have rational actors. The DOJ’s unexpected lawsuit here has always seemed irrational. I mean, you don’t let everyone else in the industry merge and then tell the last 2 carriers that they have to remain smaller than all the government-sanctioned behemoths. Meanwhile, we all know that AA and US aren’t fierce competitors: if Americans are going to be “saved” by lower airfares, it’s going to be done by Spirit, JetBlue, Virgin, Frontier, Allegiant, etc. And I think everyone also knows that it’s in our national’s interest to have at least 3 large global carriers to compete on the world stage, where competition looks quite fierce and the USA airlines look fairly weak.
    So this lawsuit is just plain dumb. But we knew that when it was filed. So why was it filed? Ideology? Incompetency? A combination of the two (my personal guess)? Has the gov’t realized this now? I mean, that would be “rational,” but remember we’re dealing with an irrational actor.
    I still think the most probable outcome is that the gov’t gets some modest concessions and declares victory before the trial. The second most likely outcome is that it goes to trial and the airlines win. The least likely outcome is the gov’t wins in court.

    • tharanga says:

      I think you’re missing the point that the DOJ hadn’t really considered connecting markets when it looked at the previous mergers. It seems like some passenger lobby groups had started making noise in that way, and the DOJ couldn’t ignore it.

      Also, different people will interpret the same things in different ways. Bill Baer wasn’t in his current position for the previous mergers. He’s there now, and you can see how he reads the current situation.

      So the lack of consistency isn’t really that surprising.

  18. JB says:

    With the recent United devaluation, it is even more important that this merger doesn’t happen.

    • Goober says:

      this merger is happening and it’s whats best for both airlines.

      ITs going to be settled and the idiots who don’t understand the industry will be proven wrong yet again.

  19. tharanga says:

    why is Greyhound, er I mean American, depicted as the bride?

    • CF says:

      tharanga – Well, not to focus too much on stereotypical gender roles, but US Airways is the clearly the “head of household” here.

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